Greater Scrutiny of Colleges And Ties to Student Lenders

By JONATHAN D. GLATER

Published: February 3, 2007

Colleges and universities from Massachusetts to California began receiving formal requests for information yesterday from the New York attorney general's office as part of an investigation of financial relationships they or individual college officials have with student loan companies.

The inquiry by the attorney general, Andrew M. Cuomo, shows a sharpening focus by government officials on the often undisclosed relationships between loan companies and colleges and universities, particularly as tuition has soared and private student loans have become a lucrative, fast-growing business.

Senator Edward M. Kennedy, Democrat of Massachusetts and chairman of the Senate education committee, is taking aim at so-called preferred-lender lists, which college financial aid offices compile to recommend loan companies to students. Because students tend to rely on advice from those offices, getting on the list is crucial, and lenders use various tactics to curry favor with colleges and universities.

Mr. Kennedy is pushing a bill that would require the disclosure of such arrangements; ban gifts and services worth more than $10 to college employees; and require lenders to tell students that they might be eligible for low-interest federal loans.

The federal Education Department, which until recently paid relatively little attention to such practices, is now weighing whether to regulate preferred-lender lists, perhaps by requiring colleges and universities to include a certain minimum number of loan companies as options; some institutions have just one or two on their lists.

These combined efforts could pose a peril to some loan companies, which have flourished as private student loans, not guaranteed by the federal government, have grown at an average rate of 27 percent annually since 2001. Private loans now make up 20 percent of total education loan volume; students took out more than $17 billion in such loans last year, according to the College Board.

But the most aggressive action so far is by Mr. Cuomo, who has demanded information from eight loan companies, including Education Finance Partners and Sallie Mae, the nation's largest student lender, and plans to query more than 60 colleges and universities.

''My office is seeking to ensure that students are being steered toward lenders offering the most competitive rates, not those who offer the best perks to schools or financial aid administrators,'' Mr. Cuomo said in a statement.

In an interview, Tamera Briones, the chief executive of Education Finance Partners, defended her company, which has arrangements with several institutions in which it sends money to a college based on the amount students borrow, with payments increasing with loan volume. Ms. Briones said loan terms did not change based on whether an institution received such payments.

''What I believe will occur is, a thorough investigation will be done, and at the end of the day, I don't believe that the attorney general's office will find any significant wrongdoing,'' Ms. Briones said.

She added that her company had cooperated with Mr. Cuomo's office.

Most of the colleges and universities getting letters from Mr. Cuomo are outside New York, but may be subject to the jurisdiction of the attorney general because they have students from the state.

Mr. Cuomo has sent letters to 10 colleges in California, 9 in Pennsylvania and 8 in Massachusetts. Seven New York institutions are getting letters, as well as ones in Michigan, New Jersey, South Carolina and Texas, among other states. Some colleges and universities have already received the requests.

St. John's University has received one, said Dominic Scianna, a spokesman, adding that its lawyers were reviewing the letter. The University of Nebraska has gotten one, too, said Kelly Bartling, a spokeswoman there, as has Boston University, said Colin Riley, a spokesman.

John Beckman, a spokesman for New York University, which also received a letter, said, ''We select preferred lenders based on the competitiveness of their rates for the greatest number of N.Y.U. students and the quality of the loan service they offer, which is what we shall indicate in responding fully to their questions.''

John T. Milgrim, a spokesman for Mr. Cuomo's office, declined to answer questions about how the colleges were selected to receive letters, or to provide a copy of a letter.

''The list of the schools was compiled based on our investigation,'' Mr. Milgrim said.

The kinds of arrangements loan companies may have with colleges vary. One type is the kind that Education Finance Partners has -- paying a college increasing sums of money based on loan activity.

Other lenders, including Sallie Mae, make money available to an institution for loans to students with poor credit, also based in part on private loan volume. Tom Joyce, a spokesman for Sallie Mae, said the company was cooperating fully with Mr. Cuomo's office.

But Mr. Joyce warned against over-regulation of students' options for financing their education.

''Choices about lending programs for students,'' he said, ''and who ought to serve a student and family population are best made on the campus by people who know those students and families best.''

''Those decisions should not be made by bureaucrats in Washington,'' he added.

Mr. Joyce also warned that excessive restrictions on preferred-lender lists might result in students' receiving a barrage of bewildering direct-marketing materials from loan companies.

He said, ''Students are still going to go to the financial aid office and say, 'Who do I work with? What do I do?' ''

The attention to preferred-lender lists is one more sign that access to higher education has become a hot topic. Just this week, Democratic lawmakers and President Bush appeared to compete to raise the maximum amount of money for Pell Grants, federal grants to middle- and low-income students.

And House Democrats with much fanfare passed legislation last month to cut interest rates on subsidized federal student loans.